2014-07-07

How Long Can the Greenback Stay Cocky?

Here's an updated look at COFER data through Q1 2014. The U.S. dollar has fallen below 61% of allocated reserves, the first time since a very small and very brief dip in 2011. As can be seen, the decline of the U.S. dollar is a result of growth in the Canadian and Australian dollars. This is a slow, gradual relative decline in the U.S. dollar's role, not so much a decline as being out paced. U.S. dollar holdings did decline outright in Q1 2014 though, down 1.12% from Q4 2013.

In order to have the "death of the dollar" type crises predicted by some, it would require a purposeful dumping of the U.S. dollar or at least a prolonged continuation of the decline in dollar assets seen in Q1. At the prior pace of slower dollar accumulation though, the same end is reached, only with more time and less volatility. It is illogical for a nation to be seen as speeding things along in a negative manner when the end result is foreseen years ahead, except in the case where there is an acute short-term crisis. A "hostile" financial act would spur U.S. action, possibly militarily, in addition to forcing political changes that could lead to unpredictable results.


What's more interesting is how the world is becoming less transparent. This data mainly comes from developed economies. The accumulation of Australian and Canadian dollars is significant in terms of qoq growth rates, but they are such a small amount of reserves that the absolute growth is very small. The picture is one of slow growing developed economies barely growing their reserves. In contrast to this openness and slow growth, many emerging markets do not report their central bank holdings and unallocated reserves have grown to 47.95% of total reserves. That is up a full percentage point in only the past three months, and this number was effectively flat from 2009 to 2012. In the past five quarters, it has climbed 3.5 percentage points. This is on par with the pace of unallocated reserve growth we saw prior to 2009. Unallocated reserves were 25.4% of reserves in 2002.

Perhaps as soon as Q3, unallocated reserves will have climbed to 50% of global central bank assets. With less clarity, one cannot see who is defecting.

Here's a Chinese take on the U.S. dollar's status as reserve currency. It closes with discussion of SDRs, paper gold and global system supported by the euro, yuan and U.S. dollar.

“去美元化”加速 美元还能得瑟多久?
After 2008 the international financial crisis sweeping the globe, the international monetary system defects has been hotly debated topic. Just recently, BNP Paribas (hereinafter "BP") was astronomical fines after U.S. regulators, U.S. hegemony in the international financial system began to incur other monetary economy "rise" resistance.

According to Bloomberg news that the Bank of France governor Christian Noyer recently warned against the dollar raised directly: United States to use their own rules to limit BP U.S. dollar transactions on a global scale, which will encourage (banks) to dollarization. Trade between Europe and China do not necessarily need to use the U.S. dollar, the euro or the yuan could. In addition, some have called on the EU level to find ways to try to reduce dependence on international trade and investment in the dollar.

At the same time, accelerate the rise of the Chinese yuan in the past year, especially the European market frequently "appearance" is deemed to begin to truly enter the international market and is the largest international trade zone accepted, the process of global "de-dollarization" likewise accelerating.

Nevertheless, U.S. dominance in the international financial system in the short term or difficult to shake. "Parties to the calls for reform of the international monetary system is high, but have not yet reached the framework of the overall package of reform roadmap, some symbolic partial reform progress has been very limited." People's Bank of China Deputy Governor Hu Lian said recently.

A number of countries "to dollarization" in progress

Because of dissatisfaction with the United States billions of dollars in recent BNP astronomical fines and suspension of dollar clearing business, the Bank of France governor Christian Noyer recently warned against the dollar raised directly. Division outside Pakistan, the U.S. regulatory authorities have been in violation of the sanctions on European banks out of the high fines, such punitive measures will not stop the future.

French Finance Minister Michel Sapin also said that BNP Paribas will make Europe suffered a fine reason to "mobilize" more transactions denominated in Euro, European banks such areas would not be so popular U.S. regulatory authorities clamped.

"While still dependent on the dollar, but the euro should play a more important role in international trade." French oil giant Total CEO Christophe de Margerie also recently called for an increase in the euro is the use of the settlement. "While oil is denominated in U.S. dollars, but there is no reason to pay for oil payments in U.S. dollars."

In addition, Russian companies are affected by geopolitical events in Russia and Ukraine, fear U.S. hegemony began to shift to other currencies, including the euro, the yuan, including. Just recently, Russia's second largest lender VTB and Russia signed a cooperation agreement with the respective local currency payments with Bank of China, to avoid the use of U.S. dollars in investment banking, inter-bank loans, trade finance, capital markets transactions.

It is worth noting that the accelerated internationalization of the RMB or U.S. dollar international currency would pose a threat to the central position. After the U.S. subprime mortgage crisis, the Chinese government once full attack in the international financial sector. At the global level, China's central bank governor Zhou Xiaochuan has called for by creating a super-sovereign reserve currency to gradually replace the dollar's reserve currency status.

With a currency swap, the global layout clearing bank, RMB internationalization increasingly clear roadmap, offshore centers worldwide flowering of RMB global payment status has promoted a series of achievements have become an important reason for the market for RMB "new light" is. At the same time, the European partnership with the Chinese government on monetary operations increasingly close, especially the two sides "interactive" frequently this year. Europe currently has four offshore yuan trading center, namely, Frankfurt, London, Luxembourg and Paris.

"At present, the use of RMB in international trade relative to China's economy is concerned is negligible, but in the long run, more transactions will use the yuan. Example, commodities are generally traded in U.S. dollars, but a large buy Home and sellers are Chinese people now have started in London by the introduction of RMB-denominated contracts for such transactions, and we will see more such deals happen. "Chairman of the City of London Government Policy and Resources Committee pack ink Kay recently in Shanghai "First Financial Daily" reporters interview that the current use of the renminbi is mainly concentrated in the UK and trading companies in China, but also the short-term use of the RMB will not happen in the UK and the U.S. corporate transactions.

U.S. dollar short-term or difficult international position has been "eroded"

Nevertheless, the ban provoked opposition from the short-term or difficult to pose a threat to the dollar's status. U.S. officials believe the commercial operations, the United States is irreplaceable, not open around the place.

After World War II, European countries agreed to a large major international currencies in U.S. dollars, so the dollar as a reserve currency country is widely used outside the United States. The U.S. dollar is the base currency in the foreign exchange swap and play a very important role in international payments and foreign exchange markets.

However, the U.S. dollar as the functional currency of international trade invoicing and payment of principal is secondary, the most important thing is to use the U.S. dollar as the foreign exchange reserves. It is understood that the end of the 1970s, the U.S. dollar as a reserve currency had the highest rate of nearly 80%, but by the late 1980s, the rate dropped to about 46% recently, he returned more than 60%.

From the world's official reserve currency International Monetary Fund (IMF) recently announced the composition (COFER) report, the first quarter of the world's total foreign exchange reserves rose to about $ 11.86 trillion in foreign exchange reserves have been assigned, the dollar accounted for 60.9%, which will remain the dominant reserve currency.

However, since the beginning of the second half of 2013, quarter by quarter dollar reserves down to $ 3.76 trillion currently, and foreign exchange reserves have been allocated in proportion from 61.8% last year dropped slightly to 60.9% in the current.

"If you continue to decline, it does mean that, by 2025, the dollar will become a secondary reserve currency, while China's central bank may accelerate the occurrence of such results, because about half the world's reserves held by the Chinese authorities and Other parties in other currencies as the new reserve currency instead of U.S. dollars, which is entirely possible. "economists said.

From a global reserve currency changes over the past few centuries, the currency of one country does not become the king of generations. 2008 start of the global financial crisis and the ongoing eurozone sovereign debt crisis, the most economic observers, including the World Bank shared the view that the dollar will eventually be replaced by a multi-currency system, dollar, euro and the yuan.

"Monetary system to build a long-term problem. Reforms now under discussion is the next ten years, various versions of the monetary system towards even decades, including the SDR, paper gold and diversified system, etc. I want to see is , long-term international monetary system will move toward the dollar, euro, yuan tripod pattern. "People's Bank of China chief economist Jun Ma Research Bureau recently on the" First Financial Daily "reporters, said that with the world economy and trade diversification diversified monetary system is an inevitable trend. Ten years later the three major economies of scale economies in Europe and comparable fundamentals diversified monetary system is supported.

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